HAPTER 10 The Revenue Cycle: Sales and Cash Collections

INTRODUCTION Questions to be addressed in this chapter include: What are the basic business activities and data processing operations that are performed in the revenue cycle? What decisions need to be made in the revenue cycle, and what information is needed to make these decisions? What are the major threats in the revenue cycle and the controls related to those threats?

Questions to be addressed in this chapter include:

What are the basic business activities and data processing operations that are performed in the revenue cycle?

What decisions need to be made in the revenue cycle, and what information is needed to make these decisions?

What are the major threats in the revenue cycle and the controls related to those threats?

INTRODUCTION The revenue cycle is a recurring set of business activities and related information processing operations associated with: Providing goods and services to customers Collecting their cash payments The primary external exchange of information is with customers.

The revenue cycle is a recurring set of business activities and related information processing operations associated with:

Providing goods and services to customers

Collecting their cash payments

The primary external exchange of information is with customers.

INTRODUCTION Information about revenue cycle activities flows to other accounting cycles, e.g.: The expenditure and production cycles Receive information about sales transactions so they’ll know when to initiate the purchase or production of more inventory.

Information about revenue cycle activities flows to other accounting cycles, e.g.:

The expenditure and production cycles

Receive information about sales transactions so they’ll know when to initiate the purchase or production of more inventory.

INTRODUCTION Information about revenue cycle activities flows to other accounting cycles, e.g.: The expenditure and production cycles The human resources/payroll cycle Uses information about sales to calculate commissions and bonuses.

Information about revenue cycle activities flows to other accounting cycles, e.g.:

The expenditure and production cycles

The human resources/payroll cycle

Uses information about sales to calculate commissions and bonuses.

INTRODUCTION Information about revenue cycle activities flows to other accounting cycles, e.g.: The expenditure and production cycles The human resources/payroll cycle The general ledger and reporting function Uses information produced by the revenue cycle in preparing financial statements and performance reports.

Information about revenue cycle activities flows to other accounting cycles, e.g.:

The expenditure and production cycles

The human resources/payroll cycle

The general ledger and reporting function

Uses information produced by the revenue cycle in preparing financial statements and performance reports.

INTRODUCTION The primary objective of the revenue cycle: Provide the right product in the right place at the right time for the right price.

The primary objective of the revenue cycle:

Provide the right product in the right place at the right time for the right price.

INTRODUCTION Decisions that must be made: Should we customize products? How much inventory should we carry and where? How should we deliver our product? How should we price our product? Should we give customers credit? If so, how much and on what terms? How can we process payments to maximize cash flow?

Decisions that must be made:

Should we customize products?

How much inventory should we carry and where?

How should we deliver our product?

How should we price our product?

Should we give customers credit? If so, how much and on what terms?

How can we process payments to maximize cash flow?

INTRODUCTION Management also has to evaluate the efficiency and effectiveness of revenue cycle processes: Requires data about: Events that occur Resources used Agents who participate The data needs to be accurate, reliable, and timely.

Management also has to evaluate the efficiency and effectiveness of revenue cycle processes:

Requires data about:

Events that occur

Resources used

Agents who participate

The data needs to be accurate, reliable, and timely.

INTRODUCTION In this chapter, we’ll look at: How the three basic AIS functions are carried out in the revenue cycle, i.e.: Capturing and processing data Storing and organizing the data for decisions Providing controls to safeguard resources (including data)

In this chapter, we’ll look at:

How the three basic AIS functions are carried out in the revenue cycle, i.e.:

Capturing and processing data

Storing and organizing the data for decisions

Providing controls to safeguard resources (including data)

REVENUE CYCLE BUSINESS ACTIVITIES Four basic business activities are performed in the revenue cycle: Sales order entry Shipping Billing Cash collection

Four basic business activities are performed in the revenue cycle:

Sales order entry

Shipping

Billing

Cash collection

REVENUE CYCLE BUSINESS ACTIVITIES Four basic business activities are performed in the revenue cycle: Sales order entry Shipping Billing Cash collection

Four basic business activities are performed in the revenue cycle:

Sales order entry

Shipping

Billing

Cash collection

SALES ORDER ENTRY Sales order entry is performed by the sales order department. The sales order department typically reports to the VP of Marketing. Steps in the sales order entry process include: Take the customer’s order Check the customer’s credit Check inventory availability Respond to customer inquiries (may be done by customer service or sales order entry)

Sales order entry is performed by the sales order department.

The sales order department typically reports to the VP of Marketing.

Steps in the sales order entry process include:

Take the customer’s order

Check the customer’s credit

Check inventory availability

Respond to customer inquiries (may be done by customer service or sales order entry)

1.1 Take Order Shipping 1.2 Approve Credit 1.3 Check Inv. Avail. Billing Ware- house Purchas- ing 1.4 Resp. to Cust. Inq. Customer Orders Rejected Orders Acknowledgment Orders Approved Orders Back Orders Picking List Sales Order Sales Order Inquiries Response DFD for Sales Order Entry Customer Sales Order Customer Inventory

1.1 Take Order Shipping 1.2 Approve Credit 1.3 Check Inv. Avail. Billing Ware- house Purchas- ing 1.4 Resp. to Cust. Inq. Customer Orders Rejected Orders Acknowledgment Orders Approved Orders Back Orders Picking List Sales Order Sales Order Inquiries Response DFD for Sales Order Entry Customer Sales Order Customer Inventory

1.1 Take Order Shipping 1.2 Approve Credit 1.3 Check Inv. Avail. Billing Ware- house Purchas- ing 1.4 Resp. to Cust. Inq. Customer Orders Rejected Orders Acknowledgment Orders Approved Orders Back Orders Picking List Sales Order Sales Order Inquiries Response DFD for Sales Order Entry Customer Sales Order Customer Inventory

1.1 Take Order Shipping 1.2 Approve Credit 1.3 Check Inv. Avail. Billing Ware- house Purchas- ing 1.4 Resp. to Cust. Inq. Customer Orders Rejected Orders Acknowledgment Orders Approved Orders Back Orders Picking List Sales Order Sales Order Inquiries Response DFD for Sales Order Entry Customer Sales Order Customer Inventory

SALES ORDER ENTRY Sales order entry is performed by the sales order department. The sales order department typically reports to the VP of Marketing. Steps in the process include: Take the customer’s order Check the customer’s credit Check inventory availability Respond to customer inquiries (may be done by customer service or sales order entry)

Sales order entry is performed by the sales order department.

The sales order department typically reports to the VP of Marketing.

Steps in the process include:

Take the customer’s order

Check the customer’s credit

Check inventory availability

Respond to customer inquiries (may be done by customer service or sales order entry)

SALES ORDER ENTRY Take customer orders Order data are received on a sales order document which may be completed and received: In the store By mail By phone On a website By a salesperson in the field

Take customer orders

Order data are received on a sales order document which may be completed and received:

In the store

By mail

By phone

On a website

By a salesperson in the field

SALES ORDER ENTRY The sales order (paper or electronic) indicates: Item numbers ordered Quantities Prices Salesperson

The sales order (paper or electronic) indicates:

Item numbers ordered

Quantities

Prices

Salesperson

SALES ORDER ENTRY To reduce human error, customers should enter data themselves as much as possible: On websites On OCR forms Via phone menus

To reduce human error, customers should enter data themselves as much as possible:

On websites

On OCR forms

Via phone menus

SALES ORDER ENTRY How IT can improve efficiency and effectiveness: Orders entered online can be routed directly to the warehouse for picking and shipping. Sales history can be used to customize solicitations. Choiceboards can be used to customize orders. Initially popular with Dell and Gateway. Now used for purchases of shoes and jeans!

How IT can improve efficiency and effectiveness:

Orders entered online can be routed directly to the warehouse for picking and shipping.

Sales history can be used to customize solicitations.

Choiceboards can be used to customize orders.

Initially popular with Dell and Gateway.

Now used for purchases of shoes and jeans!

SALES ORDER ENTRY Electronic data interchange (EDI) can be used to link a company directly with its customers to receive orders or even manage the customer’s inventory. Email and instant messaging are used to notify sales staff of price changes and promotions. Laptops and handheld devices can equip sales staff with presentations, prices, marketing and technical data, etc.

Electronic data interchange (EDI) can be used to link a company directly with its customers to receive orders or even manage the customer’s inventory.

Email and instant messaging are used to notify sales staff of price changes and promotions.

Laptops and handheld devices can equip sales staff with presentations, prices, marketing and technical data, etc.

SALES ORDER ENTRY Recall that one objective of the AIS is to ensure the accuracy and reliability of the data collected. With respect to sales order data, the following edit checks should be performed: Validity checks on the customer account and inventory item numbers. Completeness test to make sure all needed information was collected. Reasonableness tests comparing the quantity ordered to past history.

Recall that one objective of the AIS is to ensure the accuracy and reliability of the data collected. With respect to sales order data, the following edit checks should be performed:

Validity checks on the customer account and inventory item numbers.

Completeness test to make sure all needed information was collected.

Reasonableness tests comparing the quantity ordered to past history.

1.1 Take Order Shipping 1.2 Approve Credit 1.3 Check Inv. Avail. Billing Ware- house Purchas- ing 1.4 Resp. to Cust. Inq. Customer Orders Rejected Orders Acknowledgment Orders Approved Orders Back Orders Picking List Sales Order Sales Order Inquiries Response Customer Sales Order Customer Inventory

1.1 Take Order Shipping 1.2 Approve Credit 1.3 Check Inv. Avail. Billing Ware- house Purchas- ing 1.4 Resp. to Cust. Inq. Customer Orders Rejected Orders Acknowledgment Orders Approved Orders Back Orders Picking List Sales Order Sales Order Inquiries Response Customer Sales Order Customer Inventory

SALES ORDER ENTRY Sales order entry is performed by the sales order department. The sales order department typically reports to the VP of Marketing. Steps in the process include: Take the customer’s order Check the customer’s credit Check inventory availability Respond to customer inquiries (may be done by customer service or sales order entry)

Sales order entry is performed by the sales order department.

The sales order department typically reports to the VP of Marketing.

Steps in the process include:

Take the customer’s order

Check the customer’s credit

Check inventory availability

Respond to customer inquiries (may be done by customer service or sales order entry)

SALES ORDER ENTRY Credit sales should be approved before the order is processed any further. There are two types of credit authorization: General authorization For existing customers below their credit limit who don’t have past-due balances. Credit limits vary by customer based on past history and ability to pay. General authorization involves checking the customer master file to verify the account and status.

Credit sales should be approved before the order is processed any further.

There are two types of credit authorization:

General authorization

For existing customers below their credit limit who don’t have past-due balances.

Credit limits vary by customer based on past history and ability to pay.

General authorization involves checking the customer master file to verify the account and status.

SALES ORDER ENTRY Credit sales should be approved before the order is processed any further. There are two types of credit authorization: General authorization Specific authorization For customers who are: New Have past-due balances Are placing orders that would exceed their credit limit Specific authorization is done by the credit manager, who reports to the treasurer.

Credit sales should be approved before the order is processed any further.

There are two types of credit authorization:

General authorization

Specific authorization

For customers who are:

New

Have past-due balances

Are placing orders that would exceed their credit limit

Specific authorization is done by the credit manager, who reports to the treasurer.

SALES ORDER ENTRY How can IT improve the process? Automatic checking of credit limits and balances Emails or IMs to the credit manager for accounts needing specific authorization

How can IT improve the process?

Automatic checking of credit limits and balances

Emails or IMs to the credit manager for accounts needing specific authorization

1.1 Take Order Shipping 1.2 Approve Credit 1.3 Check Inv. Avail. Billing Ware- house Purchas- ing 1.4 Resp. to Cust. Inq. Customer Orders Rejected Orders Acknowledgment Orders Approved Orders Back Orders Picking List Sales Order Sales Order Inquiries Response Customer Sales Order Customer Inventory

1.1 Take Order Shipping 1.2 Approve Credit 1.3 Check Inv. Avail. Billing Ware- house Purchas- ing 1.4 Resp. to Cust. Inq. Customer Orders Rejected Orders Acknowledgment Orders Approved Orders Back Orders Picking List Sales Order Sales Order Inquiries Response Customer Sales Order Customer Inventory

SALES ORDER ENTRY Sales order entry is performed by the sales order department. The sales order department typically reports to the VP of Marketing. Steps in the process include: Take the customer’s order Check the customer’s credit Check inventory availability Respond to customer inquiries (may be done by customer service or sales order entry)

Sales order entry is performed by the sales order department.

The sales order department typically reports to the VP of Marketing.

Steps in the process include:

Take the customer’s order

Check the customer’s credit

Check inventory availability

Respond to customer inquiries (may be done by customer service or sales order entry)

SALES ORDER ENTRY When the order has been received and the customer’s credit approved, the next step is to ensure there is sufficient inventory to fill the order and advise the customer of the delivery date. The sales order clerk can usually reference a screen displaying: Quantity on hand Quantity already committed to others Quantity on order

When the order has been received and the customer’s credit approved, the next step is to ensure there is sufficient inventory to fill the order and advise the customer of the delivery date.

The sales order clerk can usually reference a screen displaying:

Quantity on hand

Quantity already committed to others

Quantity on order

SALES ORDER ENTRY If there are enough units to fill the order: Complete the sales order Update the quantity available field in the inventory file Notify the following departments of the sale: Shipping Inventory Billing Send an acknowledgment to the customer

If there are enough units to fill the order:

Complete the sales order

Update the quantity available field in the inventory file

Notify the following departments of the sale:

Shipping

Inventory

Billing

Send an acknowledgment to the customer

SALES ORDER ENTRY If there’s not enough to fill the order, initiate a back order. For manufacturing companies, notify the production department that more should be manufactured. For retail companies, notify purchasing that more should be purchased.

If there’s not enough to fill the order, initiate a back order.

For manufacturing companies, notify the production department that more should be manufactured.

For retail companies, notify purchasing that more should be purchased.

SALES ORDER ENTRY Accurate inventory records are needed so customers can be accurately advised of their order status. Requires careful data entry in the sales and shipping processes. Can be problematic in retail establishments: Clerks running a similar item over the scanner several times instead of running each item Mishandling of sales returns such that returned merchandise isn’t re-entered in inventory records

Accurate inventory records are needed so customers can be accurately advised of their order status.

Requires careful data entry in the sales and shipping processes.

Can be problematic in retail establishments:

Clerks running a similar item over the scanner several times instead of running each item

Mishandling of sales returns such that returned merchandise isn’t re-entered in inventory records

1.1 Take Order Shipping 1.2 Approve Credit 1.3 Check Inv. Avail. Billing Ware- house Purchas- ing 1.4 Resp. to Cust. Inq. Customer Orders Rejected Orders Acknowledgment Orders Approved Orders Back Orders Picking List Sales Order Sales Order Inquiries Response Customer Sales Order Customer Inventory

1.1 Take Order Shipping 1.2 Approve Credit 1.3 Check Inv. Avail. Billing Ware- house Purchas- ing 1.4 Resp. to Cust. Inq. Customer Orders Rejected Orders Acknowledgment Orders Approved Orders Back Orders Picking List Sales Order Sales Order Inquiries Response Customer Sales Order Customer Inventory

SALES ORDER ENTRY Sales order entry is performed by the sales order department. The sales order department typically reports to the VP of Marketing. Steps in the process include: Take the customer’s order Check the customer’s credit Check inventory availability Respond to customer inquiries (may be done by customer service or sales order entry)

Sales order entry is performed by the sales order department.

The sales order department typically reports to the VP of Marketing.

Steps in the process include:

Take the customer’s order

Check the customer’s credit

Check inventory availability

Respond to customer inquiries (may be done by customer service or sales order entry)

SALES ORDER ENTRY Another step in the sales order entry process is responding to customer inquiries: May occur before or after the order is placed The quality of this customer service can be critical to company success

Another step in the sales order entry process is responding to customer inquiries:

May occur before or after the order is placed

The quality of this customer service can be critical to company success

SALES ORDER ENTRY Many companies use Customer Relationship Management (CRM) systems to support this process: Organizes customer data to facilitate efficient and personalized service Provides data about customer needs and business practices so they can be contacted proactively about the need to reorder

Many companies use Customer Relationship Management (CRM) systems to support this process:

Organizes customer data to facilitate efficient and personalized service

Provides data about customer needs and business practices so they can be contacted proactively about the need to reorder

SALES ORDER ENTRY The goal of CRM is to retain customers: Rule of thumb: It takes 5 times as much effort to attract a new customer as it does to retain an existing one. CRMs should be seen as tools to improve the level of customer service and encourage loyalty—not as a way to keep them off your back.

The goal of CRM is to retain customers:

Rule of thumb: It takes 5 times as much effort to attract a new customer as it does to retain an existing one.

CRMs should be seen as tools to improve the level of customer service and encourage loyalty—not as a way to keep them off your back.

SALES ORDER ENTRY Transaction processing technology can be used to improve customer relationships: POS systems can link to the customer master file to: Automatically update accounts receivable. Print customized coupons (e.g., if the customer just bought yogurt, print a yogurt coupon to encourage repeat sales).

Transaction processing technology can be used to improve customer relationships:

POS systems can link to the customer master file to:

Automatically update accounts receivable.

Print customized coupons (e.g., if the customer just bought yogurt, print a yogurt coupon to encourage repeat sales).

SALES ORDER ENTRY IT should be used to automate responses to routine customer requests. Examples: Providing telephone menus or websites that lead customers to answers about Account balances Order status Frequently asked questions (FAQs) Online chat or instant messaging These methods free up customer service reps to deal with less routine issues. EXAMPLE: Timex includes their watch manuals online, so a customer who’s missing his manual can find out how to reset his watch when Daylight Savings Time rolls around. No human intervention required.

IT should be used to automate responses to routine customer requests.

Examples:

Providing telephone menus or websites that lead customers to answers about

Account balances

Order status

Frequently asked questions (FAQs)

Online chat or instant messaging

These methods free up customer service reps to deal with less routine issues.

EXAMPLE: Timex includes their watch manuals online, so a customer who’s missing his manual can find out how to reset his watch when Daylight Savings Time rolls around. No human intervention required.

SALES ORDER ENTRY The effectiveness of a website depends on its design: Review records of customer interactions to identify potential problems. A poorly-designed, difficult-to-use website can create customer ill will. A well-designed site can provide insights that lead to increased sales, e.g., by analyzing website traffic to determine products of greatest interest.

The effectiveness of a website depends on its design:

Review records of customer interactions to identify potential problems.

A poorly-designed, difficult-to-use website can create customer ill will.

A well-designed site can provide insights that lead to increased sales, e.g., by analyzing website traffic to determine products of greatest interest.

SALES ORDER ENTRY Sales order entry involved the steps of: Taking the customer’s order Checking the customer’s credit Checking inventory availability Responding to customer inquiries We have now completed sales order entry and are ready to move to the next step.

Sales order entry involved the steps of:

Taking the customer’s order

Checking the customer’s credit

Checking inventory availability

Responding to customer inquiries

We have now completed sales order entry and are ready to move to the next step.

REVENUE CYCLE BUSINESS ACTIVITIES Four basic business activities are performed in the revenue cycle: Sales order entry Shipping Billing Cash collection

Four basic business activities are performed in the revenue cycle:

Sales order entry

Shipping

Billing

Cash collection

SHIPPING The second basic activity in the revenue cycle is filling customer orders and shipping the desired merchandise. The process consists of two steps Picking and packing the order Shipping the order The warehouse department typically picks the order The shipping departments packs and ships the order Both functions include custody of inventory and ultimately report to the VP of Manufacturing.

The second basic activity in the revenue cycle is filling customer orders and shipping the desired merchandise.

The process consists of two steps

Picking and packing the order

Shipping the order

The warehouse department typically picks the order

The shipping departments packs and ships the order

Both functions include custody of inventory and ultimately report to the VP of Manufacturing.

2.1 Pick & Pack 2.2 Ship Goods Sales Order Entry Shipping Carrier Billing & Accts. Rec. Picking List Goods & Packing List Goods, Packing Slip, & Bill of Lading Bill of Lading & Packing Slip Sales Order Sales Order Inventory Shipments

2.1 Pick & Pack 2.2 Ship Goods Sales Order Entry Shipping Carrier Billing & Accts. Rec. Picking List Goods & Packing List Goods, Packing Slip, & Bill of Lading Bill of Lading & Packing Slip Sales Order Sales Order Inventory Shipments

SHIPPING The second basic activity in the revenue cycle is filling customer orders and shipping the desired merchandise. The process consists of two steps Picking and packing the order Shipping the order The warehouse department typically picks the order The shipping departments packs and ships the order Both functions include custody of inventory and ultimately report to the VP of Manufacturing.

The second basic activity in the revenue cycle is filling customer orders and shipping the desired merchandise.

The process consists of two steps

Picking and packing the order

Shipping the order

The warehouse department typically picks the order

The shipping departments packs and ships the order

Both functions include custody of inventory and ultimately report to the VP of Manufacturing.

SHIPPING A picking ticket is printed by sales order entry and triggers the pick-and-pack process The picking ticket identifies: Which products to pick What quantity Warehouse workers record the quantities picked on the picking ticket, which may be a paper or electronic document. The picked inventory is then transferred to the shipping department.

A picking ticket is printed by sales order entry and triggers the pick-and-pack process

The picking ticket identifies:

Which products to pick

What quantity

Warehouse workers record the quantities picked on the picking ticket, which may be a paper or electronic document.

The picked inventory is then transferred to the shipping department.

SHIPPING Technology can speed the movement of inventory and improve the accuracy of perpetual inventory records: Bar code scanners Conveyer belts Wireless technology so workers can receive instructions without returning to dispatch Radio frequency identification (RFID) tags: Eliminate the need to align goods with scanner Allow inventory to be tracked as it moves through warehouse Can store up to 128 bytes of data

Technology can speed the movement of inventory and improve the accuracy of perpetual inventory records:

Bar code scanners

Conveyer belts

Wireless technology so workers can receive instructions without returning to dispatch

Radio frequency identification (RFID) tags:

Eliminate the need to align goods with scanner

Allow inventory to be tracked as it moves through warehouse

Can store up to 128 bytes of data

2.1 Pick & Pack 2.2 Ship Goods Sales Order Entry Carrier Billing & Accts. Rec. Picking List Goods & Packing List Goods, Packing Slip, & Bill of Lading Bill of Lading & Packing Slip Sales Order Sales Order Inventory Shipments

2.1 Pick & Pack 2.2 Ship Goods Sales Order Entry Carrier Billing & Accts. Rec. Picking List Goods & Packing List Goods, Packing Slip, & Bill of Lading Bill of Lading & Packing Slip Sales Order Sales Order Inventory Shipments

SHIPPING The second basic activity in the revenue cycle is filling customer orders and shipping the desired merchandise. The process consists of two steps Picking and packing the order Shipping the order The warehouse department typically picks the order The shipping departments packs and ships the order Both functions include custody of inventory and ultimately report to the VP of Manufacturing.

The second basic activity in the revenue cycle is filling customer orders and shipping the desired merchandise.

The process consists of two steps

Picking and packing the order

Shipping the order

The warehouse department typically picks the order

The shipping departments packs and ships the order

Both functions include custody of inventory and ultimately report to the VP of Manufacturing.

SHIPPING The shipping department compares the following quantities: Physical count of inventory Quantities indicated on picking ticket Quantities on sales order Discrepancies can arise if: Items weren’t stored in the location indicated Perpetual inventory records were inaccurate If there are discrepancies, a back order is initiated.

The shipping department compares the following quantities:

Physical count of inventory

Quantities indicated on picking ticket

Quantities on sales order

Discrepancies can arise if:

Items weren’t stored in the location indicated

Perpetual inventory records were inaccurate

If there are discrepancies, a back order is initiated.

SHIPPING The clerk then records online: The sales order number The item numbers ordered The quantities shipped This process: Updates the quantity-on-hand field in the inventory master file Produces a packing slip The packing slip lists the quantity and description of each item in the shipment.

The clerk then records online:

The sales order number

The item numbers ordered

The quantities shipped

This process:

Updates the quantity-on-hand field in the inventory master file

Produces a packing slip

The packing slip lists the quantity and description of each item in the shipment.

SHIPPING The clerk then records online: The sales order number The item numbers ordered The quantities shipped This produces Updates the quantity-on-hand field in the inventory master file Produces a packing slip Produces multiple copies of the bill of lading The bill of lading is a legal contract that defines responsibility for goods in transit It identifies: The carrier The source The destination Special shipping instructions Who pays for the shipping

The clerk then records online:

The sales order number

The item numbers ordered

The quantities shipped

This produces

Updates the quantity-on-hand field in the inventory master file

Produces a packing slip

Produces multiple copies of the bill of lading

The bill of lading is a legal contract that defines responsibility for goods in transit

It identifies:

The carrier

The source

The destination

Special shipping instructions

Who pays for the shipping

SHIPPING The shipment is accompanied by: The packing slip A copy of the bill of lading The freight bill (Sometimes bill of lading doubles as freight bill) What happens to other copies of the bill of lading? One is kept in shipping to track and confirm delivery One is sent to billing to trigger an invoice One is retained by the freight carrier

The shipment is accompanied by:

The packing slip

A copy of the bill of lading

The freight bill

(Sometimes bill of lading doubles as freight bill)

What happens to other copies of the bill of lading?

One is kept in shipping to track and confirm delivery

One is sent to billing to trigger an invoice

One is retained by the freight carrier

SHIPPING A major shipping decision is the choice of delivery methods: Some companies maintain a fleet of trucks Companies increasingly outsource to commercial carriers Reduces costs Allows company to focus on core business Selecting best carrier means collecting and monitoring carrier performance data for: On-time delivery Condition of merchandise delivered

A major shipping decision is the choice of delivery methods:

Some companies maintain a fleet of trucks

Companies increasingly outsource to commercial carriers

Reduces costs

Allows company to focus on core business

Selecting best carrier means collecting and monitoring carrier performance data for:

On-time delivery

Condition of merchandise delivered

SHIPPING Another decision relates to the location of distribution centers Many customers want suppliers to deliver products only when needed Logistical software tools can help identify optimal locations to: Minimize amount of inventory carried Meet customers’ needs Also helps optimize the use of delivery vehicles on a day-to-day basis

Another decision relates to the location of distribution centers

Many customers want suppliers to deliver products only when needed

Logistical software tools can help identify optimal locations to:

Minimize amount of inventory carried

Meet customers’ needs

Also helps optimize the use of delivery vehicles on a day-to-day basis

SHIPPING Globalization makes outbound logistics more complex: Distribution methods differ around the world in terms of efficiency and effectiveness. Country-specific taxes and regulations affect distribution choices. Logistical software can also help with these issues. Advanced communications systems can provide real-time info on shipping status and thus add value: If you know a shipment will be late and notify the customer, it helps the customer adapt.

Globalization makes outbound logistics more complex:

Distribution methods differ around the world in terms of efficiency and effectiveness.

Country-specific taxes and regulations affect distribution choices.

Logistical software can also help with these issues.

Advanced communications systems can provide real-time info on shipping status and thus add value:

If you know a shipment will be late and notify the customer, it helps the customer adapt.

REVENUE CYCLE BUSINESS ACTIVITIES Four basic business activities are performed in the revenue cycle: Sales order entry Shipping Billing Cash collection

Four basic business activities are performed in the revenue cycle:

Sales order entry

Shipping

Billing

Cash collection

BILLING The third revenue cycle activity is billing customers. This activity involves two tasks: Invoicing Updating accounts receivable

The third revenue cycle activity is billing customers.

This activity involves two tasks:

Invoicing

Updating accounts receivable

3.1 Billing 3.2 Maintain Accts. Rec. Sales Order Entry Billing and Accounts Receivable Customer General Ledger & Rept. Sys. Shipping Mailroom Sales Order Sales Packing Slip & Bill of Lading Invoice Monthly Statements Remittance List Customer Sales

3.1 Billing 3.2 Maintain Accts. Rec. Sales Order Entry Billing and Accounts Receivable Customer General Ledger & Rept. Sys. Shipping Mailroom Sales Order Sales Packing Slip & Bill of Lading Invoice Monthly Statements Remittance List Customer Sales

BILLING The third revenue cycle activity is billing customers. This activity involves two tasks: Invoicing Updating accounts receivable

The third revenue cycle activity is billing customers.

This activity involves two tasks:

Invoicing

Updating accounts receivable

BILLING Accurate and timely billing is crucial. Billing is an information processing activity that repackages and summarizes information from the sales order entry and shipping activities Requires information from: Shipping Department on items and quantities shipped Sales on prices and other sales terms

Accurate and timely billing is crucial.

Billing is an information processing activity that repackages and summarizes information from the sales order entry and shipping activities

Requires information from:

Shipping Department on items and quantities shipped

Sales on prices and other sales terms

BILLING The basic document created is the sales invoice. The invoice notifies the customer of: The amount to be paid Where to send payment Invoices may be sent/received: In paper form By EDI Common for larger companies Faster and cheaper than snail mail

The basic document created is the sales invoice. The invoice notifies the customer of:

The amount to be paid

Where to send payment

Invoices may be sent/received:

In paper form

By EDI

Common for larger companies

Faster and cheaper than snail mail

BILLING When buyer and seller have accurate online systems: Invoicing process may be skipped Seller sends an email when goods are shipped Buyer sends acknowledgment when goods are received Buyer automatically remits payments within a specified number of days after receiving the goods Can produce substantial cost savings

When buyer and seller have accurate online systems:

Invoicing process may be skipped

Seller sends an email when goods are shipped

Buyer sends acknowledgment when goods are received

Buyer automatically remits payments within a specified number of days after receiving the goods

Can produce substantial cost savings

BILLING An integrated AIS may also merge the billing process with sales and marketing by using data about a customer’s past purchases to send information about related products and services with his monthly statement.

An integrated AIS may also merge the billing process with sales and marketing by using data about a customer’s past purchases to send information about related products and services with his monthly statement.

3.1 Billing 3.2 Maintain Accts. Rec. Sales Order Entry Customer General Ledger & Rept. Sys. Shipping Mailroom Sales Order Sales Packing Slip & Bill of Lading Invoice Monthly Statements Remittance List Customer Sales

3.1 Billing 3.2 Maintain Accts. Rec. Sales Order Entry Customer General Ledger & Rept. Sys. Shipping Mailroom Sales Order Sales Packing Slip & Bill of Lading Invoice Monthly Statements Remittance List Customer Sales

BILLING The third revenue cycle activity is billing customers. This activity involves two tasks: Invoicing Updating accounts receivable

The third revenue cycle activity is billing customers.

This activity involves two tasks:

Invoicing

Updating accounts receivable

BILLING The accounts receivable function reports to the controller This function performs two basic tasks Debits customer accounts for the amount the customer is invoiced Credits customer accounts for the amount of customer payments Two basic ways to maintain accounts receivable: Open-invoice method Balance forward method

The accounts receivable function reports to the controller

This function performs two basic tasks

Debits customer accounts for the amount the customer is invoiced

Credits customer accounts for the amount of customer payments

Two basic ways to maintain accounts receivable:

Open-invoice method

Balance forward method

BILLING OPEN-INVOICE METHOD: Customers pay according to each invoice Two copies of the invoice are typically sent to the customer Customer is asked to return one copy with payment This copy is a turnaround document called a remittance advice Advantages of open-invoice method Conducive to offering early-payment discounts Results in more uniform flow of cash collections Disadvantages of open-invoice method More complex to maintain

OPEN-INVOICE METHOD:

Customers pay according to each invoice

Two copies of the invoice are typically sent to the customer

Customer is asked to return one copy with payment

This copy is a turnaround document called a remittance advice

Advantages of open-invoice method

Conducive to offering early-payment discounts

Results in more uniform flow of cash collections

Disadvantages of open-invoice method

More complex to maintain

BILLING BALANCE FORWARD METHOD: Customers pay according to amount on their monthly statement, rather than by invoice Monthly statement lists transactions since the last statement and lists the current balance The tear-off portion includes pre-printed information with customer name, account number, and balance Customers are asked to return the stub, which serves as the remittance advice Remittances are applied against the total balance rather than against a specific invoice

BALANCE FORWARD METHOD:

Customers pay according to amount on their monthly statement, rather than by invoice

Monthly statement lists transactions since the last statement and lists the current balance

The tear-off portion includes pre-printed information with customer name, account number, and balance

Customers are asked to return the stub, which serves as the remittance advice

Remittances are applied against the total balance rather than against a specific invoice

BILLING Advantages of balance-forward method: It’s more efficient and reduces costs because you don’t bill for each individual sale It’s more convenient for the customer to make one monthly remittance

Advantages of balance-forward method:

It’s more efficient and reduces costs because you don’t bill for each individual sale

It’s more convenient for the customer to make one monthly remittance

BILLING Cycle billing is commonly used with the balance-forward method Monthly statements are prepared for subsets of customers at different times. EXAMPLE: Bill customers according to the following schedule: 1 st week of month—Last names beginning with A-F 2 nd week of month—Last names beginning with G-M 3 rd week of month—Last names beginning with N-S 4 th week of month—Last names beginning with T-Z

Cycle billing is commonly used with the balance-forward method

Monthly statements are prepared for subsets of customers at different times.

EXAMPLE: Bill customers according to the following schedule:

1 st week of month—Last names beginning with A-F

2 nd week of month—Last names beginning with G-M

3 rd week of month—Last names beginning with N-S

4 th week of month—Last names beginning with T-Z

BILLING Advantages of cycle billing: Produces more even cash flow Produces more even workload Doesn’t tie up computer for several days to print statements

Advantages of cycle billing:

Produces more even cash flow

Produces more even workload

Doesn’t tie up computer for several days to print statements

BILLING Image processing can improve the efficiency and effectiveness of managing customer accounts. Digital images of customer remittances and accounts are stored electronically Advantages: Fast, easy retrieval Copy of document can be instantly transmitted to customer or others Multiple people can view document at once Drastically reduces document storage space

Image processing can improve the efficiency and effectiveness of managing customer accounts.

Digital images of customer remittances and accounts are stored electronically

Advantages:

Fast, easy retrieval

Copy of document can be instantly transmitted to customer or others

Multiple people can view document at once

Drastically reduces document storage space

BILLING EXCEPTION PROCEDURES: ACCOUNT ADJUSTMENTS AND WRITE-OFFS: Adjustments to customer accounts may need to be made for: Returns Allowances for damaged goods Write-offs as uncollectible These adjustments are handled by the credit manager

EXCEPTION PROCEDURES: ACCOUNT ADJUSTMENTS AND WRITE-OFFS:

Adjustments to customer accounts may need to be made for:

Returns

Allowances for damaged goods

Write-offs as uncollectible

These adjustments are handled by the credit manager

BILLING If there’s a return, the credit manager: Receives confirmation from the receiving dock that the goods were actually returned to inventory Then issues a credit memo which authorizes the crediting of the customer’s account If goods are slightly damaged, the customer may agree to keep them for a price reduction Credit manager issues a credit memo to reflect that reduction

If there’s a return, the credit manager:

Receives confirmation from the receiving dock that the goods were actually returned to inventory

Then issues a credit memo which authorizes the crediting of the customer’s account

If goods are slightly damaged, the customer may agree to keep them for a price reduction

Credit manager issues a credit memo to reflect that reduction

BILLING Distribution of credit memos: One copy to accounts receivable to adjust the customer account One copy to the customer If repeated attempts to collect payment fail, the credit manager may issue a credit memo to write off an account: A copy will not be sent to the customer

Distribution of credit memos:

One copy to accounts receivable to adjust the customer account

One copy to the customer

If repeated attempts to collect payment fail, the credit manager may issue a credit memo to write off an account:

A copy will not be sent to the customer

BILLING NOTE: Since accounts receivable handles the customer accounts, why does someone else have to issue the credit memos? EXAMPLE; An accounts receivable employee could allow a relative or friend (or even himself) to run up an account with the company and then simply write the account off or credit it for returns and allowances. Having the credit memos issued by the credit manager is good segregation of duties between: Authorizing a transaction (write-off) Recording the transaction

NOTE: Since accounts receivable handles the customer accounts, why does someone else have to issue the credit memos?

EXAMPLE; An accounts receivable employee could allow a relative or friend (or even himself) to run up an account with the company and then simply write the account off or credit it for returns and allowances.

Having the credit memos issued by the credit manager is good segregation of duties between:

Authorizing a transaction (write-off)

Recording the transaction

REVENUE CYCLE BUSINESS ACTIVITIES Four basic business activities are performed in the revenue cycle: Sales order entry Shipping Billing Cash collection

Four basic business activities are performed in the revenue cycle:

Sales order entry

Shipping

Billing

Cash collection

CASH COLLECTIONS The final activity in the revenue cycle is collecting cash from customers The cashier, who reports to the treasurer, handles customer remittances and deposits them in the bank Because cash and checks are highly vulnerable, controls should be in place to discourage theft Accounts receivable personnel should not have access to cash (including checks)

The final activity in the revenue cycle is collecting cash from customers

The cashier, who reports to the treasurer, handles customer remittances and deposits them in the bank

Because cash and checks are highly vulnerable, controls should be in place to discourage theft

Accounts receivable personnel should not have access to cash (including checks)

CASH COLLECTIONS Possible approaches to collecting cash: Turnaround documents forwarded to accounts receivable The mailroom opens customer envelopes and forwards to accounts receivable either: Remittance advices Photocopies of remittance advices A remittance list prepared in the mailroom

Possible approaches to collecting cash:

Turnaround documents forwarded to accounts receivable

The mailroom opens customer envelopes and forwards to accounts receivable either:

Remittance advices

Photocopies of remittance advices

A remittance list prepared in the mailroom

CASH COLLECTIONS Possible approaches to collecting cash: Turnaround documents forwarded to accounts receivable Lockbox arrangements Customers remit payments to a bank P.O. box The bank sends the company: Remittance advices An electronic list of the remittances Copies of the checks Advantages: Prevents theft by company employees Improves cash flow management Lockboxes may be regional, which reduces time in the mail Checks are deposited immediately on receipt Foreign banks can be utilized for international customers

Possible approaches to collecting cash:

Turnaround documents forwarded to accounts receivable

Lockbox arrangements

Customers remit payments to a bank P.O. box

The bank sends the company:

Remittance advices

An electronic list of the remittances

Copies of the checks

Advantages:

Prevents theft by company employees

Improves cash flow management

Lockboxes may be regional, which reduces time in the mail

Checks are deposited immediately on receipt

Foreign banks can be utilized for international customers

CASH COLLECTIONS Possible approaches to collecting cash: Turnaround documents forwarded to accounts receivable Lockbox arrangements Electronic lockboxes Upon receiving and scanning the checks, the bank immediately sends electronic notification to the company, including: Customer account number Amount remitted

Possible approaches to collecting cash:

Turnaround documents forwarded to accounts receivable

Lockbox arrangements

Electronic lockboxes

Upon receiving and scanning the checks, the bank immediately sends electronic notification to the company, including:

Customer account number

Amount remitted

CASH COLLECTIONS Possible approaches to collecting cash: Turnaround documents forwarded to accounts receivable Lockbox arrangements Electronic lockboxes Electronic funds transfer Customers remit payment electronically to the company’s bank Eliminates mailing delays Typically done through banking system’s Automated Clearing House (ACH) network PROBLEM: Some banks do not have both EDI and EFT capabilities, which complicates the task of crediting the customer’s account on a timely basis.

Possible approaches to collecting cash:

Turnaround documents forwarded to accounts receivable

Lockbox arrangements

Electronic lockboxes

Electronic funds transfer

Customers remit payment electronically to the company’s bank

Eliminates mailing delays

Typically done through banking system’s Automated Clearing House (ACH) network

PROBLEM: Some banks do not have both EDI and EFT capabilities, which complicates the task of crediting the customer’s account on a timely basis.

CASH COLLECTIONS Possible approaches to collecting cash: Turnaround documents forwarded to accounts receivable Lockbox arrangements Electronic lockboxes Electronic funds transfer Financial electronic data interchange (FEDI) Integrates EFT with EDI Remittance data and funds transfer instructions are sent simultaneously by the customer Requires that both buyer and seller use EDI-capable banks

Possible approaches to collecting cash:

Turnaround documents forwarded to accounts receivable

Lockbox arrangements

Electronic lockboxes

Electronic funds transfer

Financial electronic data interchange (FEDI)

Integrates EFT with EDI

Remittance data and funds transfer instructions are sent simultaneously by the customer

Requires that both buyer and seller use EDI-capable banks

CASH COLLECTIONS Possible approaches to collecting cash: Turnaround documents forwarded to accounts receivable Lockbox arrangements Electronic lockboxes Electronic funds transfer Financial electronic data interchange (FEDI) Accept credit cards or procurement cards from customers Speeds collection because credit card issuer usually transfers funds within two days Typically costs 2-4% of gross sales price

Possible approaches to collecting cash:

Turnaround documents forwarded to accounts receivable

Lockbox arrangements

Electronic lockboxes

Electronic funds transfer

Financial electronic data interchange (FEDI)

Accept credit cards or procurement cards from customers

Speeds collection because credit card issuer usually transfers funds within two days

Typically costs 2-4% of gross sales price

CASH COLLECTIONS Possible approaches to collecting cash: Turnaround documents forwarded to accounts receivable Lockbox arrangements Electronic lockboxes Electronic funds transfer Financial electronic data interchange (FEDI) Accept credit cards or procurement cards from customers Electronic bill payment

Possible approaches to collecting cash:

Turnaround documents forwarded to accounts receivable

Lockbox arrangements

Electronic lockboxes

Electronic funds transfer

Financial electronic data interchange (FEDI)

Accept credit cards or procurement cards from customers

Electronic bill payment

REVIEW OF REVENUE CYCLE ACTIVITIES Before we move on to discuss internal controls in the revenue cycle, let’s do a brief review of the organization chart, including: Who does what in the revenue cycle To whom they typically report

Before we move on to discuss internal controls in the revenue cycle, let’s do a brief review of the organization chart, including:

Who does what in the revenue cycle

To whom they typically report

PARTIAL ORGANIZATION CHART FOR UNITS INVOLVED IN REVENUE CYCLE Takes customer orders Authorizes credit for existing customers in good standing Checks inventory availability

Takes customer orders

Authorizes credit for existing customers in good standing

Checks inventory availability

PARTIAL ORGANIZATION CHART FOR UNITS INVOLVED IN REVENUE CYCLE Responds to customer inquiries

Responds to customer inquiries

PARTIAL ORGANIZATION CHART FOR UNITS INVOLVED IN REVENUE CYCLE Picks the order

Picks the order

PARTIAL ORGANIZATION CHART FOR UNITS INVOLVED IN REVENUE CYCLE Packs the order Ships the order

Packs the order

Ships the order

PARTIAL ORGANIZATION CHART FOR UNITS INVOLVED IN REVENUE CYCLE Invoices the customer

Invoices the customer

PARTIAL ORGANIZATION CHART FOR UNITS INVOLVED IN REVENUE CYCLE Maintains the customer’s account: Increases customer account when sales are made Decreases account when cash is collected

Maintains the customer’s account:

Increases customer account when sales are made

Decreases account when cash is collected

PARTIAL ORGANIZATION CHART FOR UNITS INVOLVED IN REVENUE CYCLE Approves credit for new customers or existing customers with issues Authorizes credits to customer accounts for returns, allowances, and write-offs

Approves credit for new customers or existing customers with issues

Authorizes credits to customer accounts for returns, allowances, and write-offs

PARTIAL ORGANIZATION CHART FOR UNITS INVOLVED IN REVENUE CYCLE Deposits cash received from customers

Deposits cash received from customers

CONTROL: OBJECTIVES, THREATS, AND PROCEDURES In the revenue cycle (or any cycle), a well-designed AIS should provide adequate controls to ensure that the following objectives are met: All transactions are properly authorized All recorded transactions are valid All valid and authorized transactions are recorded All transactions are recorded accurately Assets are safeguarded from loss or theft Business activities are performed efficiently and effectively The company is in compliance with all applicable laws and regulations All disclosures are full and fair

In the revenue cycle (or any cycle), a well-designed AIS should provide adequate controls to ensure that the following objectives are met:

All transactions are properly authorized

All recorded transactions are valid

All valid and authorized transactions are recorded

All transactions are recorded accurately

Assets are safeguarded from loss or theft

Business activities are performed efficiently and effectively

The company is in compliance with all applicable laws and regulations

All disclosures are full and fair

CONTROL: OBJECTIVES, THREATS, AND PROCEDURES We’ll soon be discussing the threats that may occur in the revenue cycle. If you understand the preceding objectives, you probably won’t have to worry about “memorizing” threats. Almost every threat represents a violation of one of those control objectives. Let’s look more closely.

We’ll soon be discussing the threats that may occur in the revenue cycle.

If you understand the preceding objectives, you probably won’t have to worry about “memorizing” threats.

Almost every threat represents a violation of one of those control objectives.

Let’s look more closely.

CONTROL: OBJECTIVES, THREATS, AND PROCEDURES In the revenue cycle (or any cycle), a well-designed AIS should provide adequate controls to ensure that the following objectives are met: All transactions are properly authorized All recorded transactions are valid All valid and authorized transactions are recorded All transactions are recorded accurately Assets are safeguarded from loss or theft Business activities are performed efficiently and effectively The company is in compliance with all applicable laws and regulations All disclosures are full and fair A related threat would be that a transaction would go through without proper authorization. Such a transaction might result from either a mistake or a fraud. EXAMPLE: An employee might process an unauthorized write-off of his own account, so that he wouldn’t have to pay.

In the revenue cycle (or any cycle), a well-designed AIS should provide adequate controls to ensure that the following objectives are met:

All transactions are properly authorized

All recorded transactions are valid

All valid and authorized transactions are recorded

All transactions are recorded accurately

Assets are safeguarded from loss or theft

Business activities are performed efficiently and effectively

The company is in compliance with all applicable laws and regulations

All disclosures are full and fair

A related threat would be that a transaction would go through without proper authorization.

Such a transaction might result from either a mistake or a fraud.

EXAMPLE: An employee might process an unauthorized write-off of his own account, so that he wouldn’t have to pay.

CONTROL: OBJECTIVES, THREATS, AND PROCEDURES In the revenue cycle (or any cycle), a well-designed AIS should provide adequate controls to ensure that the following objectives are met: All transactions are properly authorized All recorded transactions are valid All valid and authorized transactions are recorded All transactions are recorded accurately Assets are safeguarded from loss or theft Business activities are performed efficiently and effectively The company is in compliance with all applicable laws and regulations All disclosures are full and fair The related threat is that a transaction would be recorded that isn’t valid, i.e., it didn’t actually occur. EXAMPLE 1: An employee records a return of merchandise on his own account when the goods were never really returned. EXAMPLE 2: Many financial statement frauds involve companies recording totally fictitious revenues in order to make the company’s financial position appear more favorable than it actually is.

In the revenue cycle (or any cycle), a well-designed AIS should provide adequate controls to ensure that the following objectives are met:

All transactions are properly authorized

All recorded transactions are valid

All valid and authorized transactions are recorded

All transactions are recorded accurately

Assets are safeguarded from loss or theft

Business activities are performed efficiently and effectively

The company is in compliance with all applicable laws and regulations

All disclosures are full and fair

The related threat is that a transaction would be recorded that isn’t valid, i.e., it didn’t actually occur.

EXAMPLE 1: An employee records a return of merchandise on his own account when the goods were never really returned.

EXAMPLE 2: Many financial statement frauds involve companies recording totally fictitious revenues in order to make the company’s financial position appear more favorable than it actually is.

CONTROL: OBJECTIVES, THREATS, AND PROCEDURES In the revenue cycle (or any cycle), a well-designed AIS should provide adequate controls to ensure that the following objectives are met: All transactions are properly authorized All recorded transactions are valid All valid and authorized transactions are recorded All transactions are recorded accurately Assets are safeguarded from loss or theft Business activities are performed efficiently and effectively The company is in compliance with all applicable laws and regulations All disclosures are full and fair The related threat would be that a transaction that actually did occur didn’t get recorded. EXAMPLE 1: An employee fails to record a sale that the company made to him so he won’t have to pay the receivable. EXAMPLE 2: In financial statement fraud cases, the company often fails to record transactions that reduce income or net assets, e.g., don’t record returns from customers or discounts granted to them. This omission causes net sales to appear higher than they really are.

In the revenue cycle (or any cycle), a well-designed AIS should provide adequate controls to ensure that the following objectives are met:

All transactions are properly authorized

All recorded transactions are valid

All valid and authorized transactions are recorded

All transactions are recorded accurately

Assets are safeguarded from loss or theft

Business activities are performed efficiently and effectively

The company is in compliance with all applicable laws and regulations

All disclosures are full and fair

The related threat would be that a transaction that actually did occur didn’t get recorded.

EXAMPLE 1: An employee fails to record a sale that the company made to him so he won’t have to pay the receivable.

EXAMPLE 2: In financial statement fraud cases, the company often fails to record transactions that reduce income or net assets, e.g., don’t record returns from customers or discounts granted to them. This omission causes net sales to appear higher than they really are.

CONTROL: OBJECTIVES, THREATS, AND PROCEDURES In the revenue cycle (or any cycle), a well-designed AIS should provide adequate controls to ensure that the following objectives are met: All transactions are properly authorized All recorded transactions are valid All valid and authorized transactions are recorded All transactions are recorded accurately Assets are safeguarded from loss or theft Business activities are performed efficiently and effectively The company is in compliance with all applicable laws and regulations All disclosures are full and fair The threat would be that a transaction is recorded inaccurately. Inaccurate recording typically means that a transaction is recorded either: In the wrong amount In the wrong account In the wrong time period It could also mean that the transaction was credited to the wrong agents or participants.

In the revenue cycle (or any cycle), a well-designed AIS should provide adequate controls to ensure that the following objectives are met:

All transactions are properly authorized

All recorded transactions are valid

All valid and authorized transactions are recorded

All transactions are recorded accurately

Assets are safeguarded from loss or theft

Business activities are performed efficiently and effectively

The company is in compliance with all applicable laws and regulations

All disclosures are full and fair

The threat would be that a transaction is recorded inaccurately. Inaccurate recording typically means that a transaction is recorded either:

In the wrong amount

In the wrong account

In the wrong time period

It could also mean that the transaction was credited to the wrong agents or participants.

CONTROL: OBJECTIVES, THREATS, AND PROCEDURES In the revenue cycle (or any cycle), a well-designed AIS should provide adequate controls to ensure that the following objectives are met: All transactions are properly authorized All recorded transactions are valid All valid and authorized transactions are recorded All transactions are recorded accurately Assets are safeguarded from loss or theft Business activities are performed efficiently and effectively The company is in compliance with all applicable laws and regulations All disclosures are full and fair EXAMPLES: A fraud might involve a company: Over-recording the amount of a sale (wrong amount) Recording an unearned revenue as an earned revenue (wrong account) Recording a sale earlier than it occurs (wrong time period) Crediting the wrong salesperson for the sale (wrong agent)

In the revenue cycle (or any cycle), a well-designed AIS should provide adequate controls to ensure that the following objectives are met:

All transactions are properly authorized

All recorded transactions are valid

All valid and authorized transactions are recorded

All transactions are recorded accurately

Assets are safeguarded from loss or theft

Business activities are performed efficiently and effectively

The company is in compliance with all applicable laws and regulations

All disclosures are full and fair

EXAMPLES: A fraud might involve a company:

Over-recording the amount of a sale (wrong amount)

Recording an unearned revenue as an earned revenue (wrong account)

Recording a sale earlier than it occurs (wrong time period)

Crediting the wrong salesperson for the sale (wrong agent)

CONTROL: OBJECTIVES, THREATS, AND PROCEDURES In the revenue cycle (or any cycle), a well-designed AIS should provide adequate controls to ensure that the following objectives are met: All transactions are properly authorized All recorded transactions are valid All valid and authorized transactions are recorded All transactions are recorded accurately Assets are safeguarded from loss or theft Business activities are performed efficiently and effectively The company is in compliance with all applicable laws and regulations All disclosures are full and fair The reverse side of these activities might include: Under-recording a sales return (wrong amount). Debiting an asset account instead of sales returns (wrong account) Recording the return later than it actually occurred (wrong time period)

In the revenue cycle (or any cycle), a well-designed AIS should provide adequate controls to ensure that the following objectives are met:

All transactions are properly authorized

All recorded transactions are valid

All valid and authorized transactions are recorded

All transactions are recorded accurately

Assets are safeguarded from loss or theft

Business activities are performed efficiently and effectively

The company is in compliance with all applicable laws and regulations

All disclosures are full and fair

The reverse side of these activities might include:

Under-recording a sales return (wrong amount).

Debiting an asset account instead of sales returns (wrong account)

Recording the return later than it actually occurred (wrong time period)

CONTROL: OBJECTIVES, THREATS, AND PROCEDURES In the revenue cycle (or any cycle), a well-designed AIS should provide adequate controls to ensure that the following objectives are met: All transactions are properly authorized All recorded transactions are valid All valid and authorized transactions are recorded All transactions are recorded accurately Assets are safeguarded from loss or theft Business activities are performed efficiently and effectively The company is in compliance with all applicable laws and regulations All disclosures are full and fair Threats in this area usually involve theft, destruction, or misuse of assets, including data.

In the revenue cycle (or any cycle), a well-designed AIS should provide adequate controls to ensure that the following objectives are met:

All transactions are properly authorized

All recorded transactions are valid

All valid and authorized transactions are recorded

All transactions are recorded accurately

Assets are safeguarded from loss or theft

Business activities are performed efficiently and effectively

The company is in compliance with all applicable laws and regulations

All disclosures are full and fair

Threats in this area usually involve theft, destruction, or misuse of assets, including data.

CONTROL: OBJECTIVES, THREATS, AND PROCEDURES In the revenue cycle (or any cycle), a well-designed AIS should provide adequate controls to ensure that the following objectives are met: All transactions are properly authorized All recorded transactions are valid All valid and authorized transactions are recorded All transactions are recorded accurately Assets are safeguarded from loss or theft Business activities are performed efficiently and effectively The company is in compliance with all applicable laws and regulations All disclosures are full and fair The threat is that the activities would be performed inefficiently or ineffectively.

In the revenue cycle (or any cycle), a well-designed AIS should provide adequate controls to ensure that the following objectives are met:

All transactions are properly authorized

All recorded transactions are valid

All valid and authorized transactions are recorded

All transactions are recorded accurately

Assets are safeguarded from loss or theft

Business activities are performed efficiently and effectively

The company is in compliance with all applicable laws and regulations

All disclosures are full and fair

The threat is that the activities would be performed inefficiently or ineffectively.

CONTROL: OBJECTIVES, THREATS, AND PROCEDURES In the revenue cycle (or any cycle), a well-designed AIS should provide adequate controls to ensure that the following objectives are met: All transactions are properly authorized All recorded transactions are valid All valid and authorized transactions are recorded All transactions are recorded accurately Assets are safeguarded from loss or theft Business activities are performed efficiently and effectively The company is in compliance with all applicable laws and regulations All disclosures are full and fair The obvious threat is non-compliance with laws and regulations. An example in the revenue cycle could be a car dealer who: Sells a vehicle to which he doesn’t have clear title; or Refuses to allow a customer to return a car in violation of state lemon laws. Another example might be requesting a credit check on a customer in violation of the Fair Credit Reporting Act (FCRA).

In the revenue cycle (or any cycle), a well-designed AIS should provide adequate controls to ensure that the following objectives are met:

All transactions are properly authorized

All recorded transactions are valid

All valid and authorized transactions are recorded

All transactions are recorded accurately

Assets are safeguarded from loss or theft

Business activities are performed efficiently and effectively

The company is in compliance with all applicable laws and regulations

All disclosures are full and fair

The obvious threat is non-compliance with laws and regulations.

An example in the revenue cycle could be a car dealer who:

Sells a vehicle to which he doesn’t have clear title; or

Refuses to allow a customer to return a car in violation of state lemon laws.

Another example might be requesting a credit check on a customer in violation of the Fair Credit Reporting Act (FCRA).

CONTROL: OBJECTIVES, THREATS, AND PROCEDURES In the revenue cycle (or any cycle), a well-designed AIS should provide adequate controls to ensure that the following objectives are met: All transactions are properly authorized All recorded transactions are valid All valid and authorized transactions are recorded All transactions are recorded accurately Assets are safeguarded from loss or theft Business activities are performed efficiently and effectively The company is in compliance with all applicable laws and regulations All disclosures are full and fair The threat is incomplete and/or misleading disclosures. This threat is more important in other areas, particularly those areas that involve liabilities and contingencies. However, one threat in the revenue cycle could be misleading disclosures about customers’ rights to return product.

In the revenue cycle (or any cycle), a well-designed AIS should provide adequate controls to ensure that the following objectives are met:

All transactions are properly authorized

All recorded transactions are valid

All valid and authorized transactions are recorded

All transactions are recorded accurately

Assets are safeguarded from loss or theft

Business activities are performed efficiently and effectively

The company is in compliance with all applicable laws and regulations

All disclosures are full and fair

The threat is incomplete and/or misleading disclosures.

This threat is more important in other areas, particularly those areas that involve liabilities and contingencies.

However, one threat in the revenue cycle could be misleading disclosures about customers’ rights to return product.

CONTROL: OBJECTIVES, THREATS, AND PROCEDURES While we’re going to step through a number of common threats in the revenue cycle, it’s a good idea to memorize the internal control objectives so you can think of the relevant threats on your own. If you don’t like the text version, click on the button below to see a rhyming version of the same objectives. Poet’s Corner

While we’re going to step through a number of common threats in the revenue cycle, it’s a good idea to memorize the internal control objectives so you can think of the relevant threats on your own.

If you don’t like the text version, click on the button below to see a rhyming version of the same objectives.

CONTROL: OBJECTIVES, THREATS, AND PROCEDURES Internal control is just a ballad. Are all recorded transactions valid? Are all valid transactions recorded? If not, there may be something sordid. And it should cause severe distraction If no one’s authorized the transaction.

Internal control is just a ballad.

Are all recorded transactions valid?

Are all valid transactions recorded?

If not, there may be something sordid.

And it should cause severe distraction

If no one’s authorized the transaction.

CONTROL: OBJECTIVES, THREATS, AND PROCEDURES Are entries in the right amount? Are they in the right account? Are they down in the right time? If not, your little bells should chime. Are we efficient? Are we effective? Is our compliance with the law defective? Are assets really and safely there? Are all disclosures full and fair?

Are entries in the right amount?

Are they in the right account?

Are they down in the right time?

If not, your little bells should chime.

Are we efficient? Are we effective?

Is our compliance with the law defective?

Are assets really and safely there?

Are all disclosures full and fair?

CONTROL: OBJECTIVES, THREATS, AND PROCEDURES There are several actions a company can take with respect to any cycle to reduce threats of errors or irregularities. These include: Using simple, easy-to-complete documents with clear instructions (enhances accuracy and reliability). Using appropriate application controls, such as validity checks and field checks (enhances accuracy and reliability). Providing space on forms to record who completed and who reviewed the form (encourages proper authorizations and accountability).

There are several actions a company can take with respect to any cycle to reduce threats of errors or irregularities. These include:

Using simple, easy-to-complete documents with clear instructions (enhances accuracy and reliability).

Using appropriate application controls, such as validity checks and field checks (enhances accuracy and reliability).

Providing space on forms to record who completed and who reviewed the form (encourages proper authorizations and accountability).

CONTROL: OBJECTIVES, THREATS, AND PROCEDURES Pre-numbering documents (encourages recording of valid and only valid transactions). Restricting access to blank documents (reduces risk of unauthorized transaction). In the following sections, we’ll discuss the threats that may arise in the four major steps of the revenue cycle, as well as the controls that can prevent those threats.

Pre-numbering documents (encourages recording of valid and only valid transactions).

Restricting access to blank documents (reduces risk of unauthorized transaction).

In the following sections, we’ll discuss the threats that may arise in the four major steps of the revenue cycle, as well as the controls that can prevent those threats.

THREATS IN SALES ORDER ENTRY The primary objectives of this process: Accurately and efficiently process customer orders. Ensure that all sales are legitimate and that the company gets paid for all sales Minimize revenue loss arising from poor inventory management

The primary objectives of this process:

Accurately and efficiently process customer orders.

Ensure that all sales are legitimate and that the company gets paid for all sales

Minimize revenue loss arising from poor inventory management

THREATS IN SALES ORDER ENTRY Threats in the sales order entry process include: THREAT 1: Incomplete or inaccurate customer orders THREAT 2: Sales to customers with poor credit THREAT 3: Orders that are not legitimate THREAT 4: Stockouts , carrying costs, and markdowns You can click on any of the threats below to get more information on: The types of problems posed by each threat The controls that can mitigate the threats.

Threats in the sales order entry process include:

THREAT 1: Incomplete or inaccurate customer orders

THREAT 2: Sales to customers with poor credit

THREAT 3: Orders that are not legitimate

THREAT 4: Stockouts , carrying costs, and markdowns

You can click on any of the threats below to get more information on:

The types of problems posed by each threat

The controls that can mitigate the threats.

THREATS IN SALES ORDER ENTRY THREAT NO. 1—INCOMPLETE OR INACCURATE CUSTOMER ORDER Why is this a problem? It’s inefficient. The customer has to be re-contacted, and the order has to be re-entered. Causes customer dissatisfaction and may impact future sales. Controls: Data entry controls, such as completeness checks Automatic lookup of reference data like customer address Reasonableness tests comparing quantity ordered to past history Return to Threat Menu Go To Next Threat

THREAT NO. 1—INCOMPLETE OR INACCURATE CUSTOMER ORDER

Why is this a problem?

It’s inefficient. The customer has to be re-contacted, and the order has to be re-entered.

Causes customer dissatisfaction and may impact future sales.

Controls:

Data entry controls, such as completeness checks

Automatic lookup of reference data like customer address

Reasonableness tests comparing quantity ordered to past history

THREATS IN SALES ORDER ENTRY THREAT NO. 2—SALES TO CUSTOMERS WITH POOR CREDIT Why is this a problem? Sales may be uncollectible, resulting in lost assets or revenues. Controls: Follow proper authorization procedures for credit sales, e.g.: Setting credit limits for each customer. Granting general authorization to sales order staff for customers who are: Existing customers Under their credit limits With no outstanding balances

THREAT NO. 2—SALES TO CUSTOMERS WITH POOR CREDIT

Why is this a problem?

Sales may be uncollectible, resulting in lost assets or revenues.

Controls:

Follow proper authorization procedures for credit sales, e.g.:

Setting credit limits for each customer.

Granting general authorization to sales order staff for customers who are:

Existing customers

Under their credit limits

With no outstanding balances

THREATS IN SALES ORDER ENTRY Other cases require specific authorization by someone other than the sales rep (usually done by the credit manager). This type of authorization is especially important if the sales rep is paid on commission. Salespeople should have read-only access to customer credit data. Credit should be approved prior to releasing goods from inventory. Accurate records of customer balances and credit limits must be maintained (the decision is only as good as the information provided). Return to Threat Menu Go To Next Threat

Other cases require specific authorization by someone other than the sales rep (usually done by the credit manager). This type of authorization is especially important if the sales rep is paid on commission.

Salespeople should have read-only access to customer credit data.

Credit should be approved prior to releasing goods from inventory.

Accurate records of customer balances and credit limits must be maintained (the decision is only as good as the information provided).

THREATS IN SALES ORDER ENTRY THREAT NO. 3—ORDERS THAT ARE NOT LEGITIMATE Why is this a problem? You can’t make good credit decisions or collect from a customer you haven’t properly identified. EXAMPLE: An Oklahoma office supply store accepted a telephone order for goods that were subsequently shipped to a woman in Indiana. Afterwards, the store discovered that the order had been called in from a prison inmate for shipment to his mom on Mother’s Day. The inmate had used a stolen credit card number. The office supply store ate the loss.

THREAT NO. 3—ORDERS THAT ARE NOT LEGITIMATE

Why is this a problem?

You can’t make good credit decisions or collect from a customer you haven’t properly identified.

EXAMPLE: An Oklahoma office supply store accepted a telephone order for goods that were subsequently shipped to a woman in Indiana. Afterwards, the store discovered that the order had been called in from a prison inmate for shipment to his mom on Mother’s Day. The inmate had used a stolen credit card number. The office supply store ate the loss.

THREATS IN SALES ORDER ENTRY Traditionally, legitimacy of customer orders is established by receipt of a signed purchase order from the customer. Digital signatures and digital certificates provide similar control for electronic business transactions. Online credit card transactions with retail customers are fraught with issues.

Traditionally, legitimacy of customer orders is established by receipt of a signed purchase order from the customer.

Digital signatures and digital certificates provide similar control for electronic business transactions.

Online credit card transactions with retail customers are fraught with issues.

THREATS IN SALES ORDER ENTRY Some actions companies are taking with online or phone-order retail customers: Requiring the three-digit code on the back of the credit card for confirmation that the customer physically possesses the card. Requiring that customers use PayPal. Sending emails to the customer to confirm the transaction. Return to Threat Menu Go To Next Threat

Some actions companies are taking with online or phone-order retail customers:

Requiring the three-digit code on the back of the credit card for confirmation that the customer physically possesses the card.

Requiring that customers use PayPal.

Sending emails to the customer to confirm the transaction.

THREATS IN SALES ORDER ENTRY THREAT NO. 4—STOCKOUTS, CARRYING COSTS, AND MARKDOWNS Why is this a problem? If you run out of merchandise, you may lose sales. If you carry too much merchandise, you incur excess carrying costs and/or have to mark the inventory down to sell it. Controls: Accurate inventory control and sales forecasting systems. Online inventory systems that allow recording of changes to inventory in real time.

THREAT NO. 4—STOCKOUTS, CARRYING COSTS, AND MARKDOWNS

Why is this a problem?

If you run out of merchandise, you may lose sales.

If you carry too much merchandise, you incur excess carrying costs and/or have to mark the inventory down to sell it.

Controls:

Accurate inventory control and sales forecasting systems.

Online inventory systems that allow recording of changes to inventory in real time.

THREATS IN SALES ORDER ENTRY Periodic physical counts of inventory to verify accuracy of the records. Regular review of sales forecasts to make adjustments. Return to Threat Menu Go To Next Threat

Periodic physical counts of inventory to verify accuracy of the records.

Regular review of sales forecasts to make adjustments.

THREATS IN SHIPPING The primary objectives of the shipping process are: Fill customer orders efficiently and accurately Safeguard inventory Threats in the shipping process include: THREAT 5: Shipping Errors THREAT 6: Theft of Inventory You can click on any of the threats above to get more information on: The types of problems posed by each threat The controls that can mitigate the threats.

The primary objectives of the shipping process are:

Fill customer orders efficiently and accurately

Safeguard inventory

Threats in the shipping process include:

THREAT 5: Shipping Errors

THREAT 6: Theft of Inventory

You can click on any of the threats above to get more information on:

The types of problems posed by each threat

The controls that can mitigate the threats.

THREATS IN SHIPPING THREAT NO. 5—SHIPPING ERRORS Why is this a problem? Customer dissatisfaction and lost sales may occur if customers are shipped the wrong items or there are delays because of a wrong address. Shipping to the wrong address may also result in loss of the assets. Controls: Online shipping systems can require shipping clerks to enter the quantities being shipped before the goods are actually shipped. Errors can thus be detected and corrected before shipment.

THREAT NO. 5—SHIPPING ERRORS

Why is this a problem?

Customer dissatisfaction and lost sales may occur if customers are shipped the wrong items or there are delays because of a wrong address.

Shipping to the wrong address may also result in loss of the assets.

Controls:

Online shipping systems can require shipping clerks to enter the quantities being shipped before the goods are actually shipped. Errors can thus be detected and corrected before shipment.

THREATS IN SHIPPING Use of bar code scanners and RFID tags to record picking and shipping. If data entry is performed manually, application controls such as field checks and completeness tests can reduce errors. The packing slip and bill of lading should not be printed until accuracy of the shipment has been verified. Return to Threat Menu Go To Next Threat

Use of bar code scanners and RFID tags to record picking and shipping.

If data entry is performed manually, application controls such as field checks and completeness tests can reduce errors.

The packing slip and bill of lading should not be printed until accuracy of the shipment has been verified.

THREATS IN SHIPPING THREAT NO. 6—THEFT OF INVENTORY Why is this a problem? Loss of assets Inaccurate inventory records (since thieves don’t generally record the reduction in inventory) Controls: Inventory should be kept in a secure location with restricted access. Inventory transfers should be documented. Inventory should be released for shipping only with approved sales orders.

THREAT NO. 6—THEFT OF INVENTORY

Why is this a problem?

Loss of assets

Inaccurate inventory records (since thieves don’t generally record the reduction in inventory)

Controls:

Inventory should be kept in a secure location with restricted access.

Inventory transfers should be documented.

Inventory should be released for shipping only with approved sales orders.

THREATS IN SHIPPING Employees who handle inventory should sign the documents or enter their codes online so that accountability for losses can be traced. Wireless communication and RFID tags can provide real-time tracking, which may reduce thefts while in transit. Physical counts of inventory should be made periodically, and employees with custody should be held accountable for shortages. Return to Threat Menu Go To Next Threat

Employees who handle inventory should sign the documents or enter their codes online so that accountability for losses can be traced.

Wireless communication and RFID tags can provide real-time tracking, which may reduce thefts while in transit.

Physical counts of inventory should be made periodically, and employees with custody should be held accountable for shortages.

THREATS IN BILLING The primary objectives of the billing process are to ensure: Customers are billed for all sales Invoices are accurate Customer accounts are accurately maintained Threats that relate to this process are: THREAT 7: Failure to bill customers THREAT 8: Billing errors THREAT 9: Errors in maintaining customer accounts You can click on any of the threats below to get more information on: The types of problems posed by each threat The controls that can mitigate the threats.

The primary objectives of the billing process are to ensure:

Customers are billed for all sales

Invoices are accurate

Customer accounts are accurately maintained

Threats that relate to this process are:

THREAT 7: Failure to bill customers

THREAT 8: Billing errors

THREAT 9: Errors in maintaining customer accounts

You can click on any of the threats below to get more information on:

The types of problems posed by each threat

The controls that can mitigate the threats.

THREATS IN BILLING THREAT NO. 7—FAILURE TO BILL CUSTOMERS Why is this a problem? Loss of assets and revenues Inaccurate data on sales, inventory, and accounts receivable Controls: Segregate shipping and billing functions. (An employee who does both could ship merchandise to friends without billing them.)

THREAT NO. 7—FAILURE TO BILL CUSTOMERS

Why is this a problem?

Loss of assets and revenues

Inaccurate data on sales, inventory, and accounts receivable

Controls:

Segregate shipping and billing functions. (An employee who does both could ship merchandise to friends without billing them.)

THREATS IN BILLING Sales orders, picking tickets, packing slips, and sales invoices should be sequentially numbered and periodically accounted for. (If you can’t match an invoice to every sales order or packing slip, the customer hasn’t been billed.) In invoice-less systems, you must ensure that every shipment is recorded, since the shipment triggers recording of the account receivable. Return to Threat Menu Go To Next Threat

Sales orders, picking tickets, packing slips, and sales invoices should be sequentially numbered and periodically accounted for. (If you can’t match an invoice to every sales order or packing slip, the customer hasn’t been billed.)

In invoice-less systems, you must ensure that every shipment is recorded, since the shipment triggers recording of the account receivable.

THREATS IN BILLING THREAT NO. 8—BILLING ERRORS Why is this a problem? Loss of assets if you under-bill Customer dissatisfaction if you over-bill Controls: Have the computer retrieve prices from the inventory master file. Avoid quantity errors by checking quantities on the packing slip against quantities on the sales order. Bar code scanners can also reduce data entry errors. Return to Threat Menu Go To Next Threat

THREAT NO. 8—BILLING ERRORS

Why is this a problem?

Loss of assets if you under-bill

Customer dissatisfaction if you over-bill

Controls:

Have the computer retrieve prices from the inventory master file.

Avoid quantity errors by checking quantities on the packing slip against quantities on the sales order.

Bar code scanners can also reduce data entry errors.

THREATS IN BILLING THREAT NO. 9—ERRORS IN MAINTAINING CUSTOMER ACCOUNTS Why is this a problem? Leads to customer dissatisfaction and loss of future sales May indicate theft of cash Controls: Edit checks such as: Validity checks on customer and invoice numbers so amounts are applied to the correct account Closed-loop verification Field check to ensure payment amounts are numeric

THREAT NO. 9—ERRORS IN MAINTAINING CUSTOMER ACCOUNTS

Why is this a problem?

Leads to customer dissatisfaction and loss of future sales

May indicate theft of cash

Controls:

Edit checks such as:

Validity checks on customer and invoice numbers so amounts are applied to the correct account

Closed-loop verification

Field check to ensure payment amounts are numeric

THREATS IN BILLING Batch totals to detect posting errors. Compare number of accounts updated with number of checks received. Reconciliations performed by an independent party. Sending monthly statements to every customer to provide independent review. Return to Threat Menu Go To Next Threat

Batch totals to detect posting errors.

Compare number of accounts updated with number of checks received.

Reconciliations performed by an independent party.

Sending monthly statements to every customer to provide independent review.

THREATS IN CASH COLLECTION The primary objective of the cash collection process: Safeguard customer remittances The major threat to this process: THREAT 10: Theft of cash You can click on the above threat to get more information on: The types of problems posed by the threat The controls that can mitigate the threat

The primary objective of the cash collection process:

Safeguard customer remittances

The major threat to this process:

THREAT 10: Theft of cash

You can click on the above threat to get more information on:

The types of problems posed by the threat

The controls that can mitigate the threat

THREATS IN CASH COLLECTION THREAT NO. 10—THEFT OF CASH Why is this a problem? Loss of cash Controls: Segregation of duties between: Handling cash and posting to customer accounts. (A person who can do both can lap accounts.) Handling cash and authorizing credit memos. (A person who does both could steal a customer remittance and authorize a credit to the customer’s account, so the customer won’t be notified he’s past due.) Authorizing credit memos and maintaining customer accounts. (A person who does both could write of an account for himself, family members, or friends.)

THREAT NO. 10—THEFT OF CASH

Why is this a problem?

Loss of cash

Controls:

Segregation of duties between:

Handling cash and posting to customer accounts. (A person who can do both can lap accounts.)

Handling cash and authorizing credit memos. (A person who does both could steal a customer remittance and authorize a credit to the customer’s account, so the customer won’t be notified he’s past due.)

Authorizing credit memos and maintaining customer accounts. (A person who does both could write of an account for himself, family members, or friends.)

THREATS IN CASH COLLECTION Minimizing the handling of money and checks through lockbox arrangements, etc. Prompt documentation and restrictive endorsements of customer remittances. Two people opening mail together. Remittance data sent to accounts receivable while cash and checks are sent to cashier. Checking that total credits to accounts receivable equal total debits to cash. Sending copy of remittance list to internal auditing to be compared with validated deposit slips and bank statements (verifies all checks were deposited).

Minimizing the handling of money and checks through lockbox arrangements, etc.

Prompt documentation and restrictive endorsements of customer remittances.

Two people opening mail together.

Remittance data sent to accounts receivable while cash and checks are sent to cashier.

Checking that total credits to accounts receivable equal total debits to cash.

Sending copy of remittance list to internal auditing to be compared with validated deposit slips and bank statements (verifies all checks were deposited).

THREATS IN CASH COLLECTION Sending monthly statements to customers to provide independent review. Using cash registers in retail establishments that automatically produce a written record of all cash received. Offering inducements to customers to look at their receipts (so they’ll notice if a clerk rings up a sale incorrectly). Deposit all remittances in the bank daily (facilitates accurate reconciliations and safeguards cash). Having bank reconciliations done by an independent party. Return to Threat Menu Go To Next Threat

Sending monthly statements to customers to provide independent review.

Using cash registers in retail establishments that automatically produce a written record of all cash received.

Offering inducements to customers to look at their receipts (so they’ll notice if a clerk rings up a sale incorrectly).

Deposit all remittances in the bank daily (facilitates accurate reconciliations and safeguards cash).

Having bank reconciliations done by an independent party.

GENERAL CONTROL ISSUES Two general objectives pertain to activities in every cycle: Accurate data should be available when needed Activities should be performed efficiently and effectively The related general threats are: THREAT 11: Loss, Alteration, or Unauthorized Disclosure of Data THREAT 12: Poor performance You can click on any of the threats below to get more information on: The types of problems posed by each threat The controls that can mitigate the threats.

Two general objectives pertain to activities in every cycle:

Accurate data should be available when needed

Activities should be performed efficiently and effectively

The related general threats are:

THREAT 11: Loss, Alteration, or Unauthorized Disclosure of Data

THREAT 12: Poor performance

You can click on any of the threats below to get more information on:

The types of problems posed by each threat

The controls that can mitigate the threats.

GENERAL CONTROL ISSUES THREAT NO. 11—LOSS, ALTERATION, OR UNAUTHORIZED DISCLOSURE OF DATA Why is this a problem? Loss of all accounts receivable data could threaten a company’s continued existence. Loss or alteration of data could cause: Errors in external or internal reporting. Inaccurate responses to customer inquiries. Unauthorized disclosure of confidential customer information can cause: Dissatisfied customers and loss of future sales Legal sanctions and fines

THREAT NO. 11—LOSS, ALTERATION, OR UNAUTHORIZED DISCLOSURE OF DATA

Why is this a problem?

Loss of all accounts receivable data could threaten a company’s continued existence.

Loss or alteration of data could cause:

Errors in external or internal reporting.

Inaccurate responses to customer inquiries.

Unauthorized disclosure of confidential customer information can cause:

Dissatisfied customers and loss of future sales

Legal sanctions and fines

GENERAL CONTROL ISSUES Controls: The sales file, cash receipts file, accounts receivable master file, and most recent transaction file should be backed up regularly. At least one backup on site and one offsite. All disks and tapes should have external and internal files to reduce chance of accidentally erasing important data. Access controls should be utilized: User IDs and passwords Compatibility matrices Controls for individual terminals (e.g., so the receiving dock can’t enter a sales order) Logs of all activities, particularly those requiring specific authorizations

Controls:

The sales file, cash receipts file, accounts receivable master file, and most recent transaction file should be backed up regularly.

At least one backup on site and one offsite.

All disks and tapes should have external and internal files to reduce chance of accidentally erasing important data.

Access controls should be utilized:

User IDs and passwords

Compatibility matrices

Controls for individual terminals (e.g., so the receiving dock can’t enter a sales order)

Logs of all activities, particularly those requiring specific authorizations

GENERAL CONTROL ISSUES Default settings on ERP systems usually allow users far too much access to data, so these systems must be modified to enforce proper segregation of duties. Sensitive data should be encrypted in storage and in transmission. Websites should use SSL for secure customer communications. Parity checks, acknowledgment messages, and control totals should be used to ensure transmission accuracy. Return to Threat Menu Go To Next Threat

Default settings on ERP systems usually allow users far too much access to data, so these systems must be modified to enforce proper segregation of duties.

Sensitive data should be encrypted in storage and in transmission.

Websites should use SSL for secure customer communications.

Parity checks, acknowledgment messages, and control totals should be used to ensure transmission accuracy.

GENERAL CONTROL ISSUES THREAT NO. 12—POOR PERFORMANCE Why is this a problem? May damage customer relations Reduces profitability Controls: Prepare and review performance reports Return to Threat Menu Go To Next Threat

THREAT NO. 12—POOR PERFORMANCE

Why is this a problem?

May damage customer relations

Reduces profitability

Controls:

Prepare and review performance reports

REVENUE CYCLE INFORMATION NEEDS We’ve examined the various threats in the revenue cycle and the controls that can mitigate those threats. Let’s move on to summarize the information needs in the revenue cycle.

We’ve examined the various threats in the revenue cycle and the controls that can mitigate those threats.

Let’s move on to summarize the information needs in the revenue cycle.

REVENUE CYCLE INFORMATION NEEDS Information is needed for the following operational tasks in the revenue cycle: Responding to customer inquiries Deciding on extending credit to a customer Determining inventory availability Selecting merchandise delivery methods

Information is needed for the following operational tasks in the revenue cycle:

Responding to customer inquiries

Deciding on extending credit to a customer

Determining inventory availability

Selecting merchandise delivery methods

REVENUE CYCLE INFORMATION NEEDS Information is needed for the following strategic decisions: Setting prices for products/services Establishing policies on returns and warranties Deciding on credit terms Determining short-term borrowing needs Planning new marketing campaigns

Information is needed for the following strategic decisions:

Setting prices for products/services

Establishing policies on returns and warranties

Deciding on credit terms

Determining short-term borrowing needs

Planning new marketing campaigns

REVENUE CYCLE INFORMATION NEEDS The AIS needs to provide information to evaluate performance of the following: Response time to customer inquiries Time to fill and deliver orders Percentage of sales orders back ordered Customer satisfaction rates and trends Analyses of market share and sales trends Profitability by product, customer, and region Sales volume in dollars and market share Effectiveness of advertising and promotions Sales staff performance Bad debt expense and credit policies

The AIS needs to provide information to evaluate performance of the following:

Response time to customer inquiries

Time to fill and deliver orders

Percentage of sales orders back ordered

Customer satisfaction rates and trends

Analyses of market share and sales trends

Profitability by product, customer, and region

Sales volume in dollars and market share

Effectiveness of advertising and promotions

Sales staff performance

Bad debt expense and credit policies

REVENUE CYCLE INFORMATION NEEDS Both financial and non-financial information are needed to manage and evaluate revenue cycle activities. Likewise, both external and internal information is needed.

Both financial and non-financial information are needed to manage and evaluate revenue cycle activities.

Likewise, both external and internal information is needed.

REVENUE CYCLE INFORMATION NEEDS When the AIS integrates information from the various cycles, sources, and types, the reports that can be generated are unlimited. They include reports on: Sales order entry efficiency Sales breakdowns by salesperson, region, product, etc. Profitability by territory, customer, etc. Frequency and size of backorders Slow-moving products Projected cash inflows and outflows (called a cash budget ) Accounts receivable aging Revenue margin (gross margin minus selling costs)

When the AIS integrates information from the various cycles, sources, and types, the reports that can be generated are unlimited. They include reports on:

Sales order entry efficiency

Sales breakdowns by salesperson, region, product, etc.

Profitability by territory, customer, etc.

Frequency and size of backorders

Slow-moving products

Projected cash inflows and outflows (called a cash budget )

Accounts receivable aging

Revenue margin (gross margin minus selling costs)

REVENUE CYCLE INFORMATION NEEDS Accountants should continually refine and improve an organization’s performance reports.

Accountants should continually refine and improve an organization’s performance reports.

SUMMARY You’ve learned about the basic business activities and data processing operations in the revenue cycle, including: Sales order entry Shipping Billing Cash Collection You’ve learned how IT can improve the efficiency and effectiveness of those processes.

You’ve learned about the basic business activities and data processing operations in the revenue cycle, including:

Sales order entry

Shipping

Billing

Cash Collection

You’ve learned how IT can improve the efficiency and effectiveness of those processes.

SUMMARY You’ve learned about decisions that need to be made in the revenue cycle and what information is required to make these decisions. You’ve also learned about the major threats that present themselves in the revenue cycle and the controls that can be instigated to mitigate those threats.

You’ve learned about decisions that need to be made in the revenue cycle and what information is required to make these decisions.

You’ve also learned about the major threats that present themselves in the revenue cycle and the controls that can be instigated to mitigate those threats.